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Banks and credit card companies are unhappy with the government’s request to alleviate the burden of high interest credit card rates. But a lack of action will cause a major real estate market crash in Canada in the next 12 months.

The government’s response so far has been to organize billions of dollars in handouts to Canadians. But this short-term solution won’t prevent the years of economic hardship ahead, and it leaves the nearly 70 per cent of Canadians who own homes without a fighting chance.

Homeowners need a nationwide financial strategy that will help them pull through this crisis. And there is one.

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This strategy is easy to implement and requires no cash injection from the government, but it will help Canadians for years to come and will have a lasting positive impact on the economy. The government needs to take three simple steps.

Step One: Allow homeowners to use home equity to pay off debts

About 68 per cent of Canadians own homes, and have equity. They should be able to use that equity to fight this war. These Canadians will also help their families, friends and neighbours, because that’s who Canadians are and that’s what Canada is.

One of the main purposes of buying a home is to build up equity for a rainy day. Allow Canadians to refinance their homes up to 90 per cent, and allow CMHC and mortgage insurance for all refinances of 60 to 90 per cent loan to value.

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Under this program, the 65 per cent of the refinance proceedings has to be used to pay off and close high interest rate credit cards, loans and second or third mortgages. All settled credit cards will be closed and individuals can’t take out a new one for three years.

With this product you can allow amortization of up to 35 years and remove the mortgage stress test, as long as borrowers choose a five-year fixed mortgage. To assist them further, qualify customers based on their income as of Dec. 31, 2019.

This debt refinance initiative will allow Canadian households to replace credit cards carrying 19.99 per cent to 30 per cent interest with a 2.49 per cent amortized mortgage. Canadians would save more than $75 billion in interest payments over eight years.

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The liquidity will also help prevent a real estate crash. People will not be forced to sell their home to tap into their equity, which may be their only choice now, but will keep their homes and use the equity to pay down other financial obligations.

Another significant benefit: it will help Canadians maintain and improve their credit ratings, which in the future will also help them avoid high interest loans, mortgages, credit cards and shadow lenders.

Step Two: Implement a 12-month Equifax/TransUnion Reporting freeze

The Canadian government is strong in the fight against poverty. We can strengthen existing initiatives with one of the most impactful weapons against poverty: good credit.

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Millions of Canadians have lost their jobs and will not be able to make timely payments on their bills. Credit card, auto finance, utility or insurance companies will automatically issue negative ratings or register collection notices on people’s credit reports during the next several months.

This will have a devastating effect on the economy for the next seven to 10 years, as bad debt, collections and judgments linger on peoples’ credit scores. Many won’t be able to buy homes, cars or attain business loans to start new ventures — all because they got bad credit during the coronavirus crisis. The government needs to act now to protect the credit ratings of people impacted by the pandemic so they can resume their normal lives once this is over.

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This doesn’t require lenders or service companies to forgive any debts. People will be responsible for their credit cards, car payments and other obligations. But lenders can provide them a 12-month grace period on reporting slow payments. After 12 months, reporting will start again as normal. Give people a chance to recover by protecting their credit. Then they can live up to their responsibilities.

Payday loan companies, loan sharks and shadow lenders take advantage of Canada’s high criminal interest rate. According to section 347 of the Criminal Code, the interest rate becomes criminal at 60 per cent. Lenders can gouge Canadians with products like payday loans, lines of credit, second and third mortgages, credit cards, and so forth using annual percentage rates (APR) approaching 59 per cent, just slightly under the criminal rate. In today’s economy where the prime interest rate has been around 3 or lower, our government should act to protect innocent Canadians from these predatory rates and lenders.

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Such protection will also force financial service companies to bring down credit card interest rates. Many existing financial products in the marketplace are just below or very close to this interest limit.

Reducing the criminal interest rate will save Canadians billions of dollars per year from high interest loans and financial products they shouldn’t have taken in the first place. Protecting Canadians from predatory interest rates is always important, but now it’s more important than ever.

Allowing Canadians to use low-interest home equity to pay off high-interest debts, enacting a credit freeze and lowering the criminal interest rate will create an economic climate where homeowners can weather this unprecedented storm. This will in turn protect their families, businesses, credit and mental health. It will help their employees and neighbours and pull the Canadian economy through this crisis. And it doesn’t require any further handouts, or the cancellation of debts. Banks will be happier replacing unsecured credit card debts with a government-insured secure debt. It will also significantly help the liquidity of Canadian banks.

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The government must act urgently, swiftly and intelligently to implement these measures and protect Canadians. Our country needs a hand up more than it needs a handout.

Alex Haditaghi is a serial entrepreneur in the financial service and tech sector. He is the founder and chairman of Radius Financial, a Canadian mortgage lender. He’s worked in Canada’s residential and commercial mortgage industry since 2001 and his companies have originated, processed or loaned over $45 billion since then. He’s the co-founder and former president of Lending Tree Canada, and also the founder of MortgageBrokers.com.

Share this Story: Advice from a mortgage lender: Three simple ways to save Canadians billions in credit interest during this unprecedented crisis

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